In May 2023, the US economy was once again on the edge. On the verge of reaching the debt ceiling
and with an agreement between the White House and Congress that took longer than expected,
the federal government came very close to default. We talked about it in
detail on our sister channel, VisualEconomik. The consequences could have been catastrophic.
(11 May 2023: Janet Yellen says U.S. default would trigger a global economic recession)
In the end, however, the crisis was averted. On 27 May President Biden announced an agreement with
the Republican bloc in Congress to extend the federal government's borrowing limit.
So, all settled, can the United States be at ease again, and is the danger over?
Well... I'm sorry but NO. As you can see, debt ceiling extension or not,
the United States remains one of the countries with the highest GDP-to-debt ratios in the
world. And not only that, the US economy will face much greater risk in the coming decades.
And that's why we on VisualPolitik have asked ourselves a few questions:
Could Uncle Sam ever default on its debts? How many times has this happened in the
past? Is everything fixed by raising the debt ceiling? How solid are the fiscal
checks and balances of the US government? Well, in this video we are going to answer
all these questions. Let's get started.
Although before you go with that, take a look at this chart:
Did you know that almost 9 out of ten VisualPolitik subscribers
are not yet subscribed to VisualEconomik? Yes, VisualEconomik is our sister channel. We
cover interesting topics such as France's constant blocking of Europe's economic development,
how Israel and Taiwan have managed to become technological superpowers,
or how tourism affects economic development. And of course, we also address many of the
great economic debates of the moment. So, if you are not yet subscribed,
don't wait any longer, we’ll leave you the link in the description
VisualPolitik viewers, while we all recognize that the US economy is a colossus, from time to time,
episodes such as the 2008 crisis or the constant threats of the government
running out of money raise many doubts. The latest debt ceiling crisis and the
potential cataclysm that could have resulted in the default of an economy whose currency is by far
the world's main value reserve is a good example. But, wait a moment, because the truth is that this
whole issue of debt, budget slippages and even defaults is not exactly new.
Way back in his farewell speech, George Washington himself dedicated a good number
of his words to warn his successors of the risk that a financial mismanagement could
pose. Take these words from 19 September 1796. "Public credit is a very important source of
strength and security. One method of preserving it consists in using it as
sparingly as possible (...) not only by avoiding occasions of expenditure,
but by making vigorous efforts in time of peace to discharge the debts which
unavoidable wars may have occasioned, not by throwing ungenerously upon
posterity the burden which we ourselves ought to bear." - George Washington, in his farewell
address to the presidency. 19 September 1796
Since then, and regardless of their political persuasion, virtually all
presidents have expressed concern about the enormous risk posed by a growing public debt.
And yet, despite all these fine words,
the truth is that the debt has continued to grow higher and higher, unchecked.
Since 1940, the debt ceiling has been raised about 90 times... That is, a little more than
once a year... Which is an understatement. This brings the first conclusion to the table:
the debt ceiling, in practice, is useless. It has not even managed to prevent president
after president from using the federal government's inexhaustible credit card.
The question is, why on earth does every US president seem hooked on debt? Where is the
country headed? Is it time for fiscal adjustment? Well, VisualPolitik community. We are going to
look at that right now. Let's get on with it.
(CEILING YES, CONTROL NO)
As we already told you on our sister channel VisualEconomik, what is now known as the
"debt ceiling" was a control mechanism that came into effect in the year 1917.
Until that time any borrowing by the treasury had to be explicitly authorized by Congress.
To make this procedure much simpler and, at the same time,
continue to control the federal government, US politicians took this tool out of their hands:
a clear and known limit to the debt that the federal government could take on. In
other words, it was a kind of double check. On the one hand, Congress approves the budgets,
but on the other hand, it prevents the federal government from taking on too much debt. So it
is assumed that when preparing the budget, this limit would have to be taken into account.
However, as the law was made, so was the trap. Year after year, the White House managed to raise
the debt ceiling higher and higher. In the end, what was conceived as a limit became little more
than a bad joke. Take a look. As you can see, the
1940 ceiling, set at some $49 billion, is today no more than an insignificant
dot on a graph that visually reflects the voracious appetite of the US government.
By the end of World War Two, the ceiling had increased fivefold. And
from then until the 1980s this ceiling doubled practically every decade.
Of course, hold on a minute, because there is a bit of a catch to this. It is true
that the federal government's debt has skyrocketed, however,
if we look at the debt-to-GDP ratio the same has not been true. Or at least it
wasn't for decades. In fact, in the 1980s the federal debt was as low as 31.7% of GDP.
The problem with the debt ceiling is that, when it comes down to it, it serves no purpose
except to generate tension. If the budgets are in deficit and the government has to go into debt,
the debt ceiling has proven to be a completely useless mechanism, except – and this cannot
be ignored – to generate a lot of political tension and by extension also economic tension.
And so, around 1970, Democratic Representative Dick Gephardt pushed for the "Gephardt Rule,"
whereby it was understood that if Congress had passed a budget that pierced the debt ceiling,
it automatically approved the extension of the debt ceiling.
To give you an idea, when this rule went into effect the ceiling was about $830 billion.
And when it was finally repealed in 1995, the ceiling was already at $5.5 trillion.
Since then, every time the debt approaches the ceiling limit, controversy erupts and not
infrequently the battle is on between the White House and Congress. Yet in the end,
it always ends up moving upwards. 2023 has been a good example.
In reality, the debt ceiling is only one side of the coin. It is clear that there
would be no debt if there were no excessive spending, or at least no spending above the
government's own revenue levels. But how far does the problem really
go? Do we really have reason to worry? To what extent is the White House addicted to debt?
Well... Let’s see. (A CHECKBOOK OUT OF CONTROL)
VisualPolitik community, I’m pretty sure the vast majority of you watching this video have some
outstanding debt: a credit card, a mortgage, a commercial loan to buy a car, student debt, etc..
And that's not necessarily a bad thing, it could even be a good thing. We could, for example,
borrow money to open a business or buy an asset that could give us profitability. In any case,
whatever it is for, if we can afford to pay the interest and repay the debt itself with
our income, then there will be no problem. The problem is when all this goes down the
drain. When we take on so much debt that the numbers just don't balance. Well,
that's what has happened to the US federal government. A government that lives with a
huge permanent budget geyser. Practically, every year that goes by, the checks written by the
White House are bigger and bigger. And this is so, even, in constant terms. Just take a look.
So the question we are all wondering is: Where does all this money go?
And yes, I know what many of you are thinking: it’s obvious [host], to defense. America spends
tons of money on weapons and soldiers, right? Well, no, the truth is that this is not the
main expense by far. In fact, in constant dollars, military spending
has not grown that much. It has been virtually stagnant for almost 20 years. Check it out:
But then, why does public spending in the United States grow so much year
after year? Where does all that money go? Well, it appears the situation in this case
is not very different from that in Europe. The vast majority of the budget increase can
be summarized in two words: social spending. Now, wait a minute, because the fact is that
federal government spending in terms of GDP remained more or less stable
for years in spite of this evolution. In other words, the economy was growing,
the government was earning more, and then it directed the vast majority of all those
resources to social spending. It even reduced investment in other areas. For example,
have you heard of how bad infrastructure is in the United States? Well, that's just one example.
The problem is that in recent years that method no longer seems sufficient. So public spending
in terms of GDP has also skyrocketed. Since the beginning of the 21st century,
federal government spending has gone from around 18% to over 30% of GDP. Even without the pandemic,
it is quite possible that public spending today would be above 24% or 25% of GDP.
But that, that is not even the biggest problem. The biggest problem is that this
level of spending has always been supported by a huge deficit.... A budget gap that in 2023
will be over 5% of GDP and that is making the public debt take off like a rocket.
Wait a minute, do you think we're exaggerating? Like a rocket? Well... Look at this.
But this is just the beginning. Here are the data and projections from the
Congressional Budget Office. As you can see, in terms of GDP,
the weight of the federal debt is expected to increase from around 100%
today to almost 200% in the next 30 years. And all this despite the fact that government
revenues are practically at record levels. You see, so far the US government has had
one enormous advantage: since the dollar is the international reserve currency,
the demand for public debt from the federal government is enormous. This has made it
possible for them to increase their debt so much without interest rates skyrocketing.
This has led to situations like this. (1 August 2011: Putin accuses U.S. of living "like
a parasite on the global economy" – EuropaPress) Of course, that has nothing to do with reality.
But be that as it may, the question is, how long can such a bubble last? Is such a path
really sustainable? Well, let's take a look. THE WORST OF THE OMENS... IS A DEFAULT POSSIBLE?)
When it comes down to it, the big budget gap that is destroying the public finances of the
federal government of the United States – and of many other countries in the world,
by the way – has a name: it is Social Security.
The progressive aging of the population is a major challenge. So far, the United
States has been able to avoid the issue... But will it be able to avoid it for much longer?
In the US social security system, current revenues do not cover the pensions promised
by the government. Nevertheless, year after year this system closes in positive figures
thanks mainly to the Retirement and Survivors Fund and the Disability Fund. Two funds that
were created in 1939 and 1956 respectively to accumulate money to meet future Social Security
payments. Because yes, in the United States, unlike in other countries, they did save for
retirement. At the end of 2022, these two funds had a combined $2.9 trillion in assets saved.
The problem is that these funds are expected to run out in a few years. Well,
even in the best-case scenario, these funds would barely last 15 to 16 years.
In the worst case scenario, they could be exhausted in less than a decade.
According to the latest projections we can envisage three possible scenarios.
That is to say, around ten years from now,
the government will have to take on more and more and more debt.
And, keep in mind that this is only the first major challenge that the White House will have
to start taking very seriously from now on. It is the first, but not the only one. Meanwhile,
the enormous debt that Uncle Sam has already incurred naturally forces him to pay interest.
In 2022, for example, the government already had to disburse almost 400 billion dollars just to pay
interest. And of course, with interest rates on the way up, everything points
to this figure continuing to increase. And it won't just be interest expenses,
social spending will also continue to grow and to top it off the growing rivalry with China and the
experience in Ukraine are making Washington politicians want to boost military spending.
In other words, the Treasury Department is going to have to juggle a lot of spending.
And, take note because a change of government is unlikely to fix anything. In recent decades, the
major bipartisan agreement in the United States has been that it's OK to spend more and more.
In 2023 we have seen how the lack of agreement on extending the debt ceiling
almost led to a default. Which set off all the alarms. It was fixed with a forward
kick that basically delays the problem. Nevertheless this will be an issue that will
be increasingly in the spotlight. The safe haven status of the dollar makes it almost unthinkable
that the United States could suspend payments... Except in the event of a political disagreement.
But the dollar's own dominance is based on confidence in the US economy and
also on the health of the government's public finances. The former is generally doing well,
the latter is going from bad to worse. It won't be today, and maybe not tomorrow either,
but sooner or later, and better sooner than later, Washington will have to find a solution. For
decades they have been able to live with a chronic budget gap, but it keeps increasing and it is
already getting too big. VisualPolitik viewers, the US economy is doing reasonably well, but
Washington politicians are not doing their part. And that means that in the medium term,
many analysts do not rule out that things will become much more tense. Especially considering
that in a few years pensions will also have to be financed with debt. There is still time,
but this fiscal bomb is undoubtedly another of the great threats facing the United States.
"A default would be unprecedented and has the potential to be catastrophic: credit markets
could freeze, the value of the dollar could plummet, U.S. interest rates could skyrocket,
the negative spillovers could reverberate around the world, and there might be a financial crisis
and recession that could echo the events of 2008 or worse." The potential macroeconomic
effect of debt ceiling brinkmanship – U.S. Department of the Treasury, October 2013)
This was our last video of a special series on the threats facing the United States:
from the Pentagon's problems, to the war with the Yuan, to Iran and North Korea. I’ll leave
the link to this playlist in the description. But having reached this point, it's your turn:
Do you think Washington will start to take this problem seriously? What
would you do to solve it? Will matters fix themselves? How will this whole story end?
As always, leave us your answer in the comments and let's open a
debate. And now if you found this video interesting don't forget to
like and subscribe to VisualPolitik if you haven't already done so.